Sole Trader vs Limited Company for UK Tradespeople — Which Is Better in 2026?

The two main structures for UK tradespeople

For the vast majority of self-employed tradespeople in the UK, the choice is between two options. A sole trader is someone who is self-employed and runs their business as an individual — there is no legal distinction between you and your business. A limited company (Ltd) is a separate legal entity registered at Companies House, distinct from you as an individual. There are other structures — partnerships, limited liability partnerships — but they are rarely the right fit for a tradesperson working alone or with a small team, so this guide focuses on the two mainstream options.

How sole trader works

Registering as a sole trader is straightforward. You tell HMRC you are self-employed — which you can do online in a few minutes — and you are required to complete a Self Assessment tax return each year by 31 January. You pay income tax on your profits and two types of National Insurance.

Class 4 National Insurance is 6% on profits between £12,570 and £50,270, and 2% above that threshold (2024/25 rates). Class 2 National Insurance was effectively abolished from April 2024 for those with profits above the small profits threshold — it is now built into the Class 4 calculation for state pension entitlement purposes, so most sole traders no longer pay a separate flat-rate Class 2 charge.

All your profits are treated as personal income. This means income tax at 20% on earnings between £12,570 and £50,270, at 40% on earnings between £50,270 and £125,140, and at 45% above that. Every pound of profit is subject to both income tax and NI, which makes sole trader tax costs rise steeply as earnings grow. There is no salary-versus-dividend flexibility — everything comes out as taxable income.

You do not need to file accounts at Companies House, your financial details are private, and for many tradespeople a basic Self Assessment return can be handled without an accountant — a bookkeeper or online software is often sufficient for simple situations.

How a limited company works

Incorporating a limited company costs £12 if you do it online at Companies House, and takes less than 24 hours. Once incorporated, the company is a separate legal entity. It pays corporation tax on its profits, and you as the director take money out via a combination of salary and dividends.

Corporation tax rates for the 2024/25 and 2025/26 tax years are: 19% on profits up to £50,000 (the small profits rate), 25% on profits above £250,000, and a marginal relief band between £50,000 and £250,000 that gradually increases the effective rate between the two. For most small trade businesses with profits under £50,000, the company pays 19% corporation tax on its profits.

After paying corporation tax, remaining profits can be distributed to you as dividends. Dividend tax rates (2024/25) are 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers. There is a dividend allowance of £500 per year (reduced from £1,000 in 2023/24 and from £2,000 the year before), so the first £500 of dividends each year is free of dividend tax.

As a director, you also pay yourself a salary from the company. This salary is a business expense, which reduces the company's taxable profit — and therefore its corporation tax bill. The optimal salary level is a calculation your accountant makes each year, because it depends on the income tax and NI thresholds that apply to you personally and the company's own NI obligations.

Optimal director salary: the two key levels

Most Ltd company directors take one of two salary levels. The first is £9,100 per year (for 2024/25), which is just below the secondary threshold for employer National Insurance. Below this point, neither you nor your company pays any NI on your salary. This keeps administration simple but means you are not building a record of NI contributions toward your state pension through PAYE — though your dividend income and prior contribution history may already cover this.

The second common level is £12,570 per year, which uses your full personal allowance. At this salary you pay no income tax, and while the company pays employer NI on the salary above £9,100, that NI cost is deductible against corporation tax — so the net effect can work out in your favour depending on your total profit level. Your accountant should model this for you each year as thresholds change. The remaining money you need is then drawn as dividends, which are taxed at the lower dividend tax rates rather than income tax rates.

Tax comparison at different profit levels

The practical question is: how much does each structure actually cost in tax at your level of profit? These comparisons use 2024/25 tax rates and the common strategy of paying a £12,570 director salary from the Ltd company, with remaining profits extracted as dividends.

At £30,000 profit

As a sole trader with £30,000 profit, after the £12,570 personal allowance you pay income tax at 20% on £17,430 (roughly £3,486) and Class 4 NI at 6% on the same amount (roughly £1,046). Total tax and NI: approximately £4,532.

Through a limited company taking a £12,570 salary and drawing the remainder as dividends: the company pays corporation tax at 19% on profits after the salary deduction, and you pay dividend tax at 8.75% on dividends above the £500 allowance. The gross tax saving versus sole trader is modest — perhaps £500 to £1,500 — but you will typically pay £800 to £1,200 more per year in accountancy fees to run a company than as a sole trader. At this profit level, many tradespeople find the net financial benefit of incorporating is minimal or even negative once accountant fees are factored in.

At £50,000 profit

As a sole trader at £50,000 profit, you are approaching the higher rate threshold. After your personal allowance, you pay 20% on income up to £50,270 and 40% on anything above — plus Class 4 NI at 6% (up to £50,270) and 2% above. Your total tax and NI bill is approximately £14,000 to £15,000.

Through a limited company at £50,000 profit, the combined tax burden — corporation tax at 19% on company profits, plus dividend tax at 8.75% on basic rate dividends — produces a total tax cost roughly £3,000 to £6,000 lower than sole trader, even after higher accountancy fees. This is the level where the switch genuinely starts making financial sense for most tradespeople. The rule of thumb used by most trade accountants is that a limited company becomes worth serious consideration once your profit exceeds £30,000 to £40,000 per year, and becomes clearly beneficial at £50,000 and above.

At £80,000 profit

At £80,000 profit, the sole trader pays income tax at 40% on a significant portion of earnings above £50,270, plus NI on the full amount. The combined tax and NI bill is typically £26,000 to £28,000.

A limited company director earning £80,000 profit and drawing a £12,570 salary plus dividends will typically pay around £18,000 to £20,000 in total tax — corporation tax on profits, dividend tax on distributions, and income tax and NI on the salary. The saving versus sole trader at this profit level is typically £8,000 to £12,000 per year. Even with accountancy fees of £1,200 to £2,000 for a company versus £400 to £600 for a sole trader Self Assessment return, the net annual saving is substantial — making the limited company structure clearly the right choice at this income level.

Advantages of sole trader

Simplicity is the main advantage. There is no Companies House registration, no annual confirmation statement, no statutory accounts to file, and no requirement for a separate business bank account (though one is still sensible). Your Self Assessment return covers everything. A basic return can be completed using HMRC's own online system or inexpensive software, without needing an accountant at all if your affairs are straightforward.

Privacy is another underappreciated benefit. As a sole trader, your income and financial details are entirely private. As a limited company director, your company's accounts are filed at Companies House and are publicly available — meaning competitors, customers, or anyone else can look up your turnover and profit figures.

There is also no annual cost overhead for running the structure itself. A sole trader who earns the same amount one year as the next has essentially zero additional compliance cost. A limited company carries ongoing fixed costs regardless of whether trade is good or bad.

Advantages of limited company

Lower tax at higher profit levels is the primary driver for most tradespeople making the switch. As shown above, the savings at £50,000 profit and above are real and meaningful.

Limited liability is the structural advantage that gives the company structure its name. As a sole trader, your personal assets — your home, your savings, your van — are theoretically at risk if the business cannot pay its debts. As a limited company director, the company's debts are legally separate from your personal assets. In practice, this protection is partial because lenders and suppliers often require personal guarantees from directors of small companies — but for trade credit accounts, supplier debts, or contract disputes, the limited liability protection can still be genuinely valuable.

Pension contributions are another significant benefit. A limited company can make employer pension contributions directly from company profits. These contributions are a business expense — they reduce the company's taxable profit and therefore its corporation tax bill. For a higher-rate taxpayer, making pension contributions through a company rather than from personal post-tax income can be substantially more efficient.

Some commercial customers — particularly larger contractors, property management firms, and public sector bodies — prefer to work with limited companies. Incorporating can therefore open doors to contract opportunities that are harder to access as a sole trader, regardless of the tax position.

Disadvantages of limited company

Higher accountancy fees are unavoidable. Running a limited company typically costs £800 to £2,000 per year in accountancy fees, compared to £300 to £600 for a sole trader Self Assessment return. The exact cost depends on your accountant, the complexity of your affairs, and whether you use bookkeeping software to keep your records organised through the year.

Admin burden is greater. As a company director you must file an annual confirmation statement at Companies House (currently £34 per year online), file annual statutory accounts, maintain proper company records, and run payroll for your own salary through PAYE with Real Time Information submissions to HMRC. These tasks are not especially complex, but they add to your administrative workload or accountant cost every year.

The personal guarantee issue means the limited liability protection is not as complete as it sounds on paper. Most trade credit accounts, commercial finance providers, and even some equipment hire companies will ask directors of small limited companies to sign a personal guarantee — meaning your personal assets are on the hook anyway if the company defaults on that particular debt. This does not eliminate the value of limited liability for other debts, but it does limit how much protection you actually get in practice.

IR35 and CIS considerations

If you work through a limited company providing services to a single client or a small number of clients — particularly in construction — you need to be aware of IR35. The IR35 rules are designed to catch arrangements where a contractor is effectively an employee of their client but uses a company structure to pay less tax. If HMRC determines your work falls inside IR35, the tax advantages of the limited company are largely removed.

Since April 2021, large and medium-sized clients are responsible for determining the IR35 status of contractors they engage. For smaller clients — those that meet the definition of a small company under the Companies Act — the responsibility remains with the contractor's company. If you work across a broad range of customers on short-duration jobs, IR35 is unlikely to apply. If you spend most of your working time with one large client, it is worth getting a status assessment.

The Construction Industry Scheme (CIS) applies to both sole traders and limited companies working as subcontractors in the construction sector. If you are registered under CIS, your contractor deducts 20% (or 30% if you are unregistered) from your payments and sends it to HMRC on your behalf. Limited companies can register for CIS gross payment status if they meet the turnover and compliance tests, which means receiving the full payment and settling the tax liability themselves — a cash flow advantage worth having at higher turnover levels.

Making the switch from sole trader to limited company

If your profits are consistently above £40,000 a year and you decide to incorporate, the process is straightforward. Register your company at Companies House using the online service — it costs £12 and is typically complete within 24 hours. You will need to choose a company name (it must not already be in use), provide a registered office address, and name at least one director and one shareholder.

Once incorporated, open a dedicated business bank account in the company name. You cannot mix company and personal finances — every transaction needs to go through the company account. Most high street banks and a growing number of challenger banks offer business accounts, with varying monthly fees and features. Some trade-focused accounts have no monthly fee for the first year.

Notify HMRC that you have ceased trading as a sole trader — you will still need to complete a final Self Assessment return for your last year as a sole trader. Register the company for corporation tax within three months of starting to trade. If your turnover will exceed the VAT threshold (currently £90,000), register for VAT. Set up payroll through HMRC's PAYE system for your director salary.

Review your contracts and customer relationships. If you have ongoing contracts in your own name as a sole trader, they will need to be novated or reissued in the company name. Most customers will not mind — for many it is simply a matter of updating their supplier records — but it needs to be done properly, especially for any significant commercial contracts.

Transfer any trade credit accounts, supplier accounts, and insurance policies to the company name. Your public liability and tools insurance will need new certificates issued in the company's name rather than your own.

Which structure is right for you?

The answer is genuinely dependent on your profit level and personal circumstances. If your annual profit is consistently below £30,000, the sole trader structure is almost certainly the right choice. The tax savings from incorporating are small, the accountancy costs are higher, and the extra admin is not worth it.

Between £30,000 and £40,000 profit, it becomes a close call. Run the numbers with an accountant who understands trade businesses — the crossover point depends on local accountancy costs, whether you need the limited liability protection, and whether incorporating opens up commercial work you cannot currently access.

Above £40,000 to £50,000 profit, the limited company structure typically wins on pure tax grounds, and the advantage grows as profits increase. At £80,000 or above, the tax saving is large enough that staying as a sole trader would be leaving a significant amount of money on the table every year.

Whatever structure you use, the foundation is the same: you need accurate records of what money is coming in and what it costs to deliver each job. Without clear profit figures, you cannot make an informed decision about structure — and you cannot give your accountant the data they need to optimise your tax position. That means tracking every job's revenue, materials, and labour costs throughout the year, not trying to reconstruct it in January from memory and a pile of receipts.